Make IT Work

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alt="Please wait for pix" align="right" hspace="0" width="283" height="346">Like the

flashing marquee of the bollywood blockbuster, the stars of the PC world have been

undergoing a dramatic but a sure change from the present. Take a look at the lineup today

and one that was there but yesterday. Worthy names such as Sterling, Modi Olivetti, ICIM,

DCM, and finally PCL are rarely seen in the mainstream of PC market and industry. To

dismiss these casualties as the by-products of a post-liberal economy would be too

simplistic. The demise of these and many other Indian brands is the story of how a global

game is played out in one of the world''s largest emerging markets and how, in many a case,

the native players were simply not savvy enough to pit their brains against the more

experienced international boxwallahs.

Of PCL Factor Et Al



If HCL and Sterling initiated the beginning of the volume sales in this country, it was
PCL which converted this skill into a fine art. Things began to change in the country as a

result of some bold initiatives in the area of PC marketing. Sterling Computers through

its marketing campaign sent the message that a PC could be a vital tool for running an

office. The latest addition to these attempts was PCL''s Dhamaka. Today, the legacy of

PCL''s offer is-it has belied the theory that PC is a costly item and that it can never be

within a common man''s budget. What is happening in the PC market now is just what other

electronic consumer goods have experienced worldwide-volume sales with plummeting margins.

The people in the business of selling PCs are learning the hard way that as theorization

of life is an impossible task, so is any prediction about the shape of the PC business to

come.

As PCs became more and more of a consumer

electronic commodity, especially in the SME and SOHO sectors, a silent paradigm shift in

the strategy of selling a PC happened. The recent IMRB report on PC buying patterns

suggests that in descending order-product quality, price, company reputation, and after

sales service are the important parameters in choosing a brand for the corporate sector.

On the other hand, in SME and SOHO sectors, price points and support are significant

variables. Probably few Indian companies like HCL and Zenith realized this change and

evolved their business strategy according to the need of the hour. That is the reason why

so much money was spent on Zenith advertisement copy-MNC quality, Indian prices. While in

some cases the Indian brands have simply been out-marketed by sheer muscle and tactics, in

an odd case or two, the seemingly powerful Indian brand has simply capitulated

anticipating a tough future. "These are cases where the Indian brands have thrown in

the towel without a fight," says an industry player.

In the last two years, the price of a PC

has taken a nosedive. On an average, each year, there was a reduction of 15 percent but

the growth in numbers more than compensated the drop in unit price. However, there was a

catch. With the MNC brands dominating the stage, many Indian brands were caught in a cleft

of sorts-while the unit price kept dropping, they were losing marketshare to the

foreigners. Hence commenced the decline of the Indian brand. As a result, the share of

some of the national brands shrunk. Notables are PCL, Modi Olivetti, and DCM DS. "It

would be wrong to argue that PCL is out of business because it tried to sell its brand at

wafer-thin margin. Most of the brands are doing it now. PCL failed because they did not

fully work out the entire logistics of selling a cheap PC. They did not manage their

inventories, finance, and quality control. As a result, the company failed to honor the

consumer''s confidence," says DK Das, Business Development Manager (East), Siemens

Nixdorf.

Market watchers also attribute the fall of

PCL to the fact that it tried to play the game of global brands without the deep pockets.

While PCL can be faulted for its acts of omissions and commissions, the company will still

be remembered for driving the price points of the PC to a level where the vanilla PC

starts from today.

The end of PCL story was the starting point

of the growth of the local assembling sector. The spoil of PCL''s share (20 percent

approx.) was mostly appropriated by the local assemblers. And the Indian brands were hit.

Then came Intel''s strategy of promoting its chips. The formulation led to a win-win

situation for Intel as well as the local assemblers. The whole idea of creating a loyal

band of local assemblers who will only use Intel chips henceforth, gave the local

assemblers a degree of respectability and dependability. This further affected the Indian

national brands in the SOHO and SME sectors. The 20-25 percent price difference between a

national brand and an assembled brand of a standard configuration considerably eroded the

price advantage of the national brand. On the other hand, taking advantage of the

situation, the MNC brands, through their offensive market campaign on quality and support,

increased visibility in the market by the opening up of more channels and introducing

price cuts (e.g. Compaq''s Presario 2110) in the first three quarters of 1997 ensconced in

the driver''s seat. "National brands, which dominated the Indian PC market till 1995,

delivered two value-adds to their customers-reliability and cost-effectiveness. The

definition of reliability underwent a redefinition with the launch of Compaq and other MNC

brands in India. The garage assemblers began to deliver dramatically lower prices than the

Indian brands from 1996 onward. As a result, Indian brands lost both the pillars on which

they had built up their market share," says Supratik Bhowmik, Marketing Manager,

Compaq.

hspace="0" width="199" height="323">Of Changing Paradigms



The other reason why the national brands found it difficult to sustain is the continuous
recession in the hardware sector. Due to the stress in the money market, the corporate

buying did not take off in the first half as expected and SOHO''s result was not altogether

dramatic. Hence, PC market grew 19 percent volume-wise but value-wise it was only 4

percent. Obviously in the inelastic market condition only two types of players could

survive. One, whose overhead cost is low, has a thin structure with a narrow client base

but always growing, and the USP is friendliness. And the other, who has a deep pocket to

sustain a period of recession, garner profits through volume sales, and the USP is

quality. Very few Indian brands over the years have attained the power of resilience to be

in the second category. "According to an IMRB report, the preference for purchase of

Indian brands in the current year is 33 percent, which is just a 4 percent growth over the

last year''s share (29 percent) and, I believe, in this situation not many Indian PC firms

can sustain their business. At the end of the recession, we may see the share of the

Indian segment being divided between fewer companies with extensive channel base,"

says Sharad Talwar, GM (Marketing), HCL Infosystems.

"If one looks at figure 2 which is a

perceptual map (of image association of real brands like HCL, Wipro, Compaq, IBM etc.), it

is product quality where MNC brands are strongly perceived. The second attribute is price

which when looked as `Value for Money'' attribute on the map is equally strong for both MNC

and Indian brands (note the equal distance from the brand positions). This is the core

platform of an assembled brand which none of these brands can usurp," says Mohan

Krishnan of IMRB.

The 1996 and 1997 PC Quest User Surveys

gave an indication to the way PC market force was shaping up. Though the sample size was

small, the survey showed that how MNCs are gradually moving toward appropriating a larger

marketshare in both desktop office PCs and home PCs. The change of fortune can be

understood from the fact that in 1996, in both the categories, the Indian national brands

were in the predominant position. The recent IMRB study also confirms this change. What is

the reaction of the Indian PC vendors? Raj Saraf, CEO, Zenith Computers, did not want to

speculate on the possible shake-out but he feels that it is not an abnormal situation

where the assembled brands have a considerable presence in the market. "Consider the

US market, where top 10 brands hold only 43 percent of the market and as far as top

national brands are concerned, I don''t think that the leading Indian vendors are in a

crisis. Obviously, the assembled section has a considerable presence. Cutting across every

section, our machines are sold and we are competing with the MNCs on every front. As far

as my brand is concerned, the marketshare is around 7 percent and this year we are growing

at the market rate," says Saraf.

The management of HCL (which according to

the IMRB survey, has a good mindshare with nearly one out of five respondents naming it as

the first brand of PC) feels that the company enjoys a strong position in the market and

armed with its two ISO 9002-certified manufacturing facilities it is taking the challenge

of both assembled and MNCs head on in the SOHO, SME, and FTU segments.

Transformation Of The Market



Last two years witnessed a transformation in the operational logistics of the PC market.
The changes that have taken place are primarily in the area of marketing and application.

On the marketing front, channel sales have become the most important vehicle of

distribution of a PC. "In the near future, the centralized buying systems of the

corporate sector will be replaced by decentralized systems. The process has already

started and we are witnessing it at Unicorp. This means channel sales is becoming very

important," says BK Mitra, Zonal Manager (East), Unicorp Industries. Second, the

direct link with the customers has almost been declining and getting replaced by channel

relationships. Vendors like Compaq and HCL are selling 90 percent of their PCs indirectly.

And here the support becomes crucial. In the FTU category, the SOHO and SME segments,

active-friendly support is a necessary condition for the success of the MNC and national

brands.

width="313" height="190">"Two years back, our profit margin was 10 percent. And 1996

onward, we found our margin dipping to 5 percent, and now it is between 2-4 percent.

Though the channel support has become crucial, I don''t know how the channels will combine

the two incompatibles-low returns and good support. One of the solutions is that in future

the customer has to pay a certain amount for support," says Arup Sarkar of Thakral

Computers, a distributor for Compaq. Obviously, the answer lies in volume sales. The

vendor who can sell in large numbers can give good support and, in turn, will be rewarded

by more sales. This means that only the large PC vendors with adequate inventories,

country-wide distribution network, and efficient managerial quality can survive. But for

the local assemblers, it is a different ballgame altogether. On a local scale, it is the

value for money and support that put them in the front of the branded PCs. Since the

overhead cost is negligible compared to those of brands, the price squeeze may not effect

their customer support. And their customer base being small, they don''t have to invest a

substantial amount on spares, warehouse, and support personnel.

Another interesting change taking place is

the PC becoming network-centric with add-on cards. The customer is looking for value

additions at a minimum extra price. Here the branded PCs may derive a substantial

advantage over the local assemblers in the short run. "What we are providing with a

box cannot be provided by a local manufacturer certainly. Take the case of CDs and other

freebies that we give with the box to the customer, and also various legal software

specific to the needs of a customer. I think these steps will ultimately give an edge to

the branded PCs over the assemblers in the local market," says Santanu Sen Sharma,

Business Entity Manager (East), HCL Infosystems Ltd.

But according to Bhowmik, the biggest

change that is taking place is the increasing acceptance of the PC as an enterprise

applications platform by large corporations. Earlier, when an organization wished to

deploy mission-critical applications, it looked at mainframes or Unix boxes. With the

increasing availability of solutions on Windows NT, these very same organizations are

reaping the benefits of price-performance which servers like Compaq, coupled with Windows

NT, can provide. The long-term implications of this is that the big central computer as we

knew it will soon disappear and will be replaced with clusters of servers.

Who''s In And Who''s Out



The year 1997-98 belongs to local assemblers. They are the market makers. Whatever
derision we can invoke against them, in terms of fly-by-night operation, bundling pirated

software and so on, it is the assemblers who regulated the market through appropriation of

around 50 percent of the marketshare in the JAS quarter. However, this does not mean that

their position is safe. The whole legal assembly sector''s business is facing a serious

threat from the East Asian crisis. With the rupee hovering around Rs 39 per dollar, the

unit price the assemblers will have to pay for the spares will be more than that of the

branded PCs since they do not buy in large numbers. This may result in the erosion of a

substantial price difference vis-a-vis branded category in the short run. The spillover

may also result in turning the legal assemblers into gray operators. In the long run,

coming down of the import duty will give a serious blow to the price advantage. Then the

real test of GIDs (Genuine Intel Dealers) will begin. Only those who can manage the

overhead cost with substantial value-addition and local customer care would survive.

Shake-outs in the assembling market are not new but the coming years might see a rise in

their frequency as there are chances of few GIDs becoming ''local satraps'' and going for

arrangements with Microsoft (e.g. Microsoft OEM system builder) to bundle legal software

with the box. "Only those local assemblers will survive in the market who can serve

the local customers meaningfully with value additions like Internet and networking

support," says Sujoy Das of Calcutta-based RDG Computers, a GID.

"I believe, like other countries, in

India too few national brands will survive alongwith the MNCs. Look at China (Legent and

Great Wall), Japan (NEC), South Korea (Samsung), Holland (Tulip), Italy (Olivetti) or

Germany (Siemens), in all of these countries, the national brands are coexisting with the

MNCs. In India, the brands that will survive (HCL will be one of them) will certainly give

the MNCs a run for their money," says Talwar. But which market segment the surviving

Indian brands will cater? Perhaps one can speculate on that.

The figure below shows the three categories

of the market segment presently operating in the PC market. At present, the national

brands are available in both the price and brand-sensitive segment. So there is an

overlapping in the brand positioning. "Our prediction is that the surviving Indian

brands, in a few years time, will be exclusively in the price segment. There are two

reasons for this: a value addition in the nature of the product in terms of innovation is

always necessary to be in the brand category. For this, a huge amount has to be spent on

R&D, which for a national company is difficult to mobilize. Second, the MNCs in the

near future will start manufacturing PCs in the country (HP). This will give them a

further advantage in positioning their brands.

"Some MNCs have tried to adopt

localized strategies like introducing low-cost entry-level machines in an effort to tap

the huge FTU market. All of them now have local stocking mechanisms, and there have been

reports of some of them setting up local manufacturing facilities as well," says

Rahul Singh of HCL. MNCs are growing at a pace which no one in the industry, in the recent

past, could speculate. With the easy availability of less than $ 1000 machines in the

international market, the mindblock that MNC machines are costlier is certainly

disappearing. If today, the local assemblers are deciding the fate of the market, the MNCs

will decide the future.

INDRANIL CHAKRABORTY,



in Calcutta.